Osg Corp. Transaction Exposure Hedging Case

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Pixonix Inc. – Addressing currency Exposure |

BPP/ FIN 422 International Economics and Finance |

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Jatin BelaniSiddharth LadsariyaMansi ShahHimani ShethHarmeet SinghJayant Verma |

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Executive Summary

Pixonix was a graphic design company that operated in Toronto, Canada. Pixonix licensed proprietary tools and software through a US Company at an annual cost of USD 7.5 mn. Since Pixonix was based in Canada, its revenues were based in Canadian dollars and expenses had to be paid in USD. Pixonix was required to make payments at the end of June each year and had to annually convert CAD cashflows into USD. Recently the CAD was strengthening and company’s profitability had been impacted positively. The outlook on the CAD for the future was that the CAD was expected to appreciate during the first half of the next year. CFO Mikayla Cain was worried about the effect the volatility in CAD would have on the company’s cash flows. To address the firms currency exposures Cain was considering two strategies – purchase forward contracts and purchase USD call options. This document analyses the benefits and tradeoffs of using currency forward / options from the prospective of Pixonix.

Implication of leaving the USD exposure unhedged

In case if Pixonix does not hedge its USD liability, there is a possibility of it experiencing volatility in its cash flows. This could lead to two possible effects. First effect is that in case if CAD depreciates with respect to USD, Pixonix can make losses due to its unhedged currency exposure. One the other hand in case if CAD further appreciates with respect to USD (which is the more likely case) then they will save on the transaction costs of hedging and can benefit from the potential upside of CAD appreciation.

Refer to Appendix 1 for detailed calculations.

We have considered 3 different scenarios with different currency exchange rates. Now to determine whether we are making a profit or a loss we are...